If you’ve never heard the term “infinite banking,” you might think it refers to waiting in an especially long line at your bank’s teller window.

In fact, infinite banking is an important financial concept that has helped many people achieve financial independence. Pioneered in the 1970s and 1980s, infinite banking allows individuals and families to essentially create their own banking system through the use of permanent life insurance.

Infinite banking is often touted as a silver bullet that can help you achieve financial independence and security. That’s an oversimplification, in my view. The solution is not for everyone, and it should be considered as just one element of a long-term financial strategy, along with investments in real estate and the markets.

Yet the potential of infinite banking is very real. “Infinite bankers” use permanent life insurance policies specifically designed to grow large cash values. Over time, larger and larger cash values become collateral for loans—on very favorable terms—to the policyholder from the insurance company.

These loans can help remove individuals’ and families’ reliance on banks as lenders for major life purchases or education spending. The cash value within the policy can also be used to fund retirement, of course. And the policyholder’s heirs receive a death benefit, enabling us to transfer assets to the next generation.

Infinite banking is attractive because it provides a number of benefits that savings vehicles such as 401(k)’s do not. They include:

  • Liquidity. It’s easy to access the cash value within permanent life policies whenever we need it.
  • Security. Infinite banking guarantees us an interest rate on the funds we accumulate within the policy’s “savings account.” In the stock or real estate markets, there are no guarantees.
  • Tax advantages. The insurance policy’s death benefits are available tax-free, and its cash value accumulates on a tax-deferred basis.

Infinite banking is a tool used by many wealthy and successful people. It isn’t for everyone and, again, it’s not a silver bullet–but it can be a powerful tool in your financial planning arsenal. Infinite banking’s potential to help you achieve financial independence and security make it well worth learning more about. In that light, I’ll be blogging regularly about this subject, explaining in more detail its workings as well as its advantages and drawbacks. Stay tuned!